Significant FCA Decision Affirms the Importance of Materiality

The U.S. Court of Appeals for the Fifth Circuit recently issued a well-reasoned decision that takes the rare step of overruling a jury finding of False Claims Act (FCA) liability, and erasing the damages award of more than $663 million, after trebling and inclusion of civil penalties. See United States ex rel. Harman v. Trinity Indus. Inc., No. 15-41172, 2017 WL 4325279 (5th Cir. Sept. 29, 2017). The decision applied the U.S. Supreme Court’s decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), and held that the qui tam relators failed to establish the materiality element required to establish FCA liability.

In Harman, a qui tam relator (“Relator”) (a private citizen authorized by the FCA’s unique qui tam provisions to bring claims of fraud on behalf of the government) pursued claims that the defendants defrauded the government by falsely certifying that highway guardrails satisfied Federal Highway Administration testing requirements. The Relator’s claim amounted to an allegation that the defendants (collectively, “Trinity”) failed to disclose to the government modifications in their design and manufacturing process, and that the government would not have purchased Trinity’s guardrail products had it known about the changes.

A significant problem with Relator’s theory was that the government did not agree. In fact, after conducting its own analysis prior to trial, and after commissioning additional and independent testing following the jury verdict, the Federal Highway Administration repeatedly concluded that Trinity’s guardrails satisfied applicable standards and were eligible to be purchased and reimbursed by the federal government, despite omissions in the paperwork Trinity submitted to the government. Harman, 2017 WL 4325279, at *3, 4.

The Fifth Circuit analyzed whether those omissions – the purported fraudulent certifications, in Relator’s view – had a tendency to influence the government’s decision to pay for Trinity’s guardrails under the FCA’s statutory definition of materiality. See 31 U.S.C. § 3729(b)(4). Along with a detailed survey of FCA cases analyzing the materiality element, the court relied on the Supreme Court’s guidance in Escobar:

[I]f the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material.

Harman, 2017 WL 4325279, at *11 (quoting Escobar, 136 S. Ct. at 2003-04). Applying this standard, the Fifth Circuit found that the government’s continued payments for Trinity guardrails, after being advised of alleged fraud and after conducting repeated testing, represented “very strong” and unrebutted evidence that Trinity’s certification inconsistencies were not material. Id. at *14, 16-17. In its decision, the Fifth Circuit cautioned against allowing relators to second-guess administrative decisions – like the decision to pay for Trinity guardrails – made by those elected and appointed through the democratic process. Id. at *17. In light of the unrebutted evidence to support the materiality element, the decision reversed the jury verdict and entered judgment as a matter of law for Trinity, providing complete vindication for the defendants. Id. at *18.

Key takeaways from the decision:

The Supreme Court’s decision in Escobar has invigorated and provided heft to the “rigorous” materiality standard, both at the pleading stage and beyond, which should assist defendants in cases where factual allegations and evidence of materiality are weak or lacking.

The Fifth Circuit’s opinion also provided a well-reasoned analysis strongly suggesting that Relator’s claims likewise could not satisfy the falsity element of FCA liability, in noting that disagreements over the quality of professional judgment are “not the stuff of fraud.” Id. at *9. This commentary is consistent with a burgeoning line of cases that underscore conventional wisdom that the FCA requires objective falsity, and that opinions, or mere disagreement among experts, in themselves are insufficient to establish falsity under the FCA.

The Fifth Circuit’s opinion similarly provided a thoughtful analysis strongly suggesting that Relator’s claims could not satisfy the FCA’s scienter requirements. Emphasizing evidence that Trinity’s omissions from its certification paperwork were “inadvertent,” id. at *10, the Fifth Circuit’s analysis was consistent with the long line of cases indicating that honest mistakes, and even negligence, are insufficient to establish scienter to satisfy the FCA. Likewise, the decision noted that Trinity reasonably relied on the expert advice and opinions of its partner, id. at *11, which is consistent with FCA cases holding that reasonable reliance on experts or third-party professional analyses may undermine an attempt to establish the necessary “knowledge” under the FCA.

Finally, the circumstances in Harman were relatively unique. Parties intending to rely on the Harman decision should compare the circumstances in that case with their own facts to evaluate the extent to which the Fifth Circuit’s comments may be applicable.